N.K. Karhail, J.M.: - (1.) THIS appeal of the revenue is directed against the order dated 11-10-1995, passed by Commissioner (Appeals)-11, Agra, for asst. yr. 1992-93.
(2.) The grounds of appeal read as under : "1. That the learned Commissioner (Appeals), Agra has erred in law and on facts in deleting the disallowance of Rs. 5,34,323 made under section 40A(3) of the IT Act, 1961, withont properly appreciating the facts and circumstances of the case as discussed by the assessing officer in his order. 2. That the learned Commissioner (Appeals), Agra has erred in law and on facts in holding that rule 6DD(j) r/w Board's Circular No. 220 is applicable in this case. That the order of the learned Commissioner (Appeals), Agra being erroneous in law and on facts be set aside and that of the assessing officer be restored." 3. Briefly stated facts are that the assessing officer found that the assessee had made cash payments to various contractors engaged for rendering service in respect of polishing and electroplating business. The total expenditure incurred on such payments amounted to Rs. 5,34,323 out of which payments made in contravention of section 40A(3) amounted to Rs. 1,88,397.55. The said payments were made to Shri Chhotey, Shri Govind, Shri Fattey and to Shri Hari Lal. The assessee pleaded that his case was covered under the provisions of rule 6DD(j) r/w Circular No. 220, as he had duly established the identity of the payee and genuineness of expenditure incurred and that always in the past he had been making payment to the contractors engaged by him in cash only because they in turn had to make payments to the workers engaged by him in cash. He further said that these contractors do not have their bank accounts as was borne out from the affidavits filed by them before the assessing officer. The assessee relied upon the decision in CIT v. Ram Agya Shyam Narain (1991) 189 ITR 470 (All) and Venktata Satyanarayana Timber Depot v. CIT (1987) 165 ITR 253 (AP). However, the assessing officer distinguished the facts of the said cases and held that there were no exceptional circumstances for making payments in cash to the contractors. Hence, he made disallowance of Rs. 6,34,323 under section 40A(3) of the Act.
(3.) ON appeal before the Commissioner (Appeals) the assessee submitted that the contractors to whom payments were made were all illiterate and were not in a position to maintain bank account. These persons were working for the assessee and rendering efficient services so that the assessee had been able to conduct his business smoothly, therefore, he could not dictate his terms to them that the payment would be made to them by cheque only. Had he so insisted, they would not have rendered services to him and thus the entire business would have suffered. He further submitted that the applicability of the section 40A(3) is not mechanical and the circumstances provided in Circular No, 220 fully cover his case. As for the assessing officer's observation that affidavits filed by them contained similar language and same Notary attested them was no ground for rejecting the affidavits as all the persons were very much in existence and still working for the assessee and the assessing officer could have examined them before brushing aside the contents of the affidavits wherein they clearly admitted that since they did not have any bank account as they were illiterate and not in a position to operate bank account and were thus accepting payments for their work in cash only. Thus, the assessing officer wrongly cast aspersions on the conduct of the assessee that he tried to manipulate the payments by not allowing the payees to maintain bank accounts. In fact, the payments had not been held to be bogus as he had himself agreed that the same had been made to contractors for doing electroplating and polishing jobs. The learned Commissioner (Appeals) held that the assessing officer wrongly covered the assessee's case under section 40A(3) as the facts fully warranted the applicability of provisions of rule 6DD(j), r/w Circular No. 220. The payments had been made for genuine business needs and were not bogus. Thus, he deleted the impugned addition.;